U.S. Capitol Building. Source: Flickr user Wally Gobetz
For Apple (AAPL 1.45%) investors, its huge cash pile has always been a paradox of sorts. On one hand, it's a powerful signal of Apple's success of turning sales into cash flow. But more recently, some investors have looked at Apple's cash pile as proof that Apple isn't doing enough to enrich shareholders. Apple has mostly placated the loudest voices, but with its financial war chest totaling $178 billion, the calls for Apple to return cash more quickly should return.
It isn't as if Apple is not trying to return cash. CEO Tim Cook instituted both a dividend and share buybacks as his capital return program, and Apple has returned nearly $103 billion to investors to date -- nearly $60 billion in the last 12 months alone. Still, the company continues to grow its cash pile through a combination of cash from operations and by taking on debt.
For those not following this story closely, it may seem nonsensical for Apple to borrow money to buy back stock (firm cost of capital concerns not withstanding), but it actually makes sense when you consider how the majority of Apple's cash is not domiciled in the United States and cannot be used to enrich shareholders, whereas debt can.
But if a new proposal from Senators Barbara Boxer (D-CA) and Rand Paul (R-KY) is of any indication, Apple may be able to bring that cash home.
Meet the Invest in Transportation Act of 2015
Many on Wall Street have been lobbying for a "repatriation holiday." Essentially, it allows businesses to "bring foreign cash home" (mostly a misnomer considering the cash is only foreign as far as accounting conventions go) at lower-than-statutory rates. For example, this particular act would allow Apple to bring home $157.8 billion of its $178 billion cash pile at the low tax rate of 6.5%. The Senators are betting on job creation from this bill.
The act discusses two ways repatriation will boost jobs. First, the act dictates the U.S. would then use that tax money to replenish the Highway Trust Fund and create jobs. Secondly, and less direct, once the cash is in the United States, these multinational companies theoretically would create jobs as well. On the whole, the act paints a win-win-win scenario -- the United States government gets more revenue, the companies gain added optionality at lower tax rates, and citizens get safer roads and bridges and millions of jobs.
Would shareholders win?
For shareholders, the bill isn't as kind -- at least not directly. The act specifically forbids using repatriated cash for buybacks or dividends for three years after the repatriation scheme ends. And that makes sense. In 2004 Congress allowed companies to repatriate cash with virtually no strings attached and the job creation simply didn't materialize. In 2011, a Senate subcommittee found the repatriation holiday to be a failed policy with participating companies reducing their American workforces, increasing stock repurchases, and not investing any more in research and development.
For the record, the U.S. Chamber of Commerce estimates a similar proposal could increase GDP by $440 billion, or an increase of roughly 2.5% of GDP. In the vein of a rising tide lifts all boats, this could benefit most investors if true. It appears the Senators aim to prevent 2004's debacle by using language forbidding the reasons for 2004's inefficacy in terms of job creation. However, this would prevent cash from being used to directly reward shareholders.
Perhaps shareholders could be directly rewarded
Last year, a similar proposal was offered in the Senate and didn't become law. In addition to the poor prior precedent, critics argue repatriation holidays actually discourage investment and tax collection by rewarding tax avoiding-behavior. In the event businesses feel they can park money abroad and receive a repatriation holiday every decade, many will choose to do so and set up offshore subsidiaries in lower-tax countries.
Over the last few years, Apple has gone to the debt markets although it has a tremendous amount of cash on its balance sheet. In addition to taking advantage of historically low rates, tapping the debt markets allows Apple to return cash to shareholders without paying repatriation taxes. It is important to note the bill hasn't been hashed out fully, but it would be hard to prevent companies (not just Apple) from doing this post repatriation within the three-year period -- violating the spirit, but not the letter, of the law.
A nice bonus, but not a game-changer
For those considering taking a position in Apple, the added optionality of Apple being able to domicile its cash at a low tax rate is a nice addition but not a reason to change your long-term outlook for the company. In addition to the possibility this act will fail, this doesn't change Apple's competitive advantages. For long-term shareholders, Apple should be evaluated on the success of its products and ecosystem. And if 2015's first fiscal quarter is of any indication, they are outperforming even the wildest expectations.
